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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
☒      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended September 30, 2020
 
☐         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to          
 
Commission File Number: 001-36559
Spark Energy, Inc.
(Exact name of registrant as specified in its charter)
Delaware 46-5453215
(State or other jurisdiction of
incorporation or organization) 		(I.R.S. Employer
Identification No.)
12140 Wickchester Ln, Suite 100
Houston, Texas 77079

(Address of principal executive offices)
 
(713) 600-2600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbols(s) Name of exchange on which registered
Class A common stock, par value $0.01 per share SPKE The NASDAQ Global Select Market
8.75% Series A Fixed-to-Floating Rate

Cumulative Redeemable Perpetual Preferred Stock, par value $0.01 per share 		SPKEP The NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.        
Large accelerated filer ☐                  Accelerated filer ☒ 
Non-accelerated filer ☐ Smaller reporting company ☐


Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
    
    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
        Yes ☐    No ☒

There were 14,627,284 shares of Class A common stock, 20,800,000 shares of Class B common stock and 3,567,543 shares of Series A Preferred Stock outstanding as of November 2, 2020.


SPARK ENERGY, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2020
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019 (unaudited)
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (unaudited)
 
4
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (unaudited)
 
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (unaudited)
 
9
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)  
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
58
ITEM 4. CONTROLS AND PROCEDURES
60
PART II. OTHER INFORMATION
61
ITEM 1. LEGAL PROCEEDINGS
61
ITEM 1A. RISK FACTORS
61
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
64
ITEM 6. EXHIBITS
66
SIGNATURES
68

1
Table of Contents
Cautionary Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. These forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), can be identified by the use of forward-looking terminology including “may,” “should,” “could,” “likely,” “will,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” “plan,” “intend,” “project,” or other similar words. All statements, other than statements of historical fact included in this Report, regarding strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans, objectives and beliefs of management are forward-looking statements. Forward-looking statements appear in a number of places in this Report and may include statements about expected impacts of COVID-19, business strategy and prospects for growth, customer acquisition costs, legal proceedings, ability to pay cash dividends, cash flow generation and liquidity, availability of terms of capital, competition and government regulation and general economic conditions. We caution readers that forward-looking statements are not guarantees of future performance and actual results may differ materially from those anticipated, expected, projected or assumed in the forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurance that such expectations will prove correct.
The forward-looking statements in this Report are subject to risks and uncertainties. Important factors that could cause actual results to materially differ from those projected in the forward-looking statements include, but are not limited to:

•evolving risks, uncertainties and impacts relating to COVID-19, including the geographic spread, the severity of the disease, the scope and duration of the COVID-19 outbreak, actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact, and the potential for continuing negative impacts of COVID-19 on economies and financial markets;
•changes in commodity prices;
•the sufficiency of risk management and hedging policies and practices;
•the impact of extreme and unpredictable weather conditions, including hurricanes and other natural disasters;
•federal, state and local regulations, including the industry's ability to address or adapt to potentially restrictive new regulations that may be enacted by public utility commissions;
•our ability to borrow funds and access credit markets;
•restrictions in our debt agreements and collateral requirements;
•credit risk with respect to suppliers and customers;
•changes in costs to acquire customers as well as actual attrition rates;
•accuracy of billing systems;
•our ability to successfully identify, complete, and efficiently integrate acquisitions into our operations;
•significant changes in, or new changes by, the independent system operators ("ISOs") in the regions we operate;
•competition; and
•the "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019, in our Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 and in "Item 1A— Risk Factors" of this Report, and in our other public filings and press releases.

You should review the risk factors and other factors noted throughout or incorporated by reference in this Report that could cause our actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements speak only as of the date of this Report. Unless required by law, we disclaim any obligation to publicly update or revise these statements whether as a result of new information, future events or otherwise. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

2
Table of Contents
PART I. — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
SPARK ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share counts)
(unaudited)
September 30, 2020 December 31, 2019
Assets
Current assets:
Cash and cash equivalents $ 75,347  $ 56,664 
Restricted cash 33  1,004 
Accounts receivable, net of allowance for doubtful accounts of $5,156 at September 30, 2020 and $4,797 at December 31, 2019
63,810  113,635 
Accounts receivable—affiliates 4,579  2,032 
Inventory 1,796  2,954 
Fair value of derivative assets 761  464 
Customer acquisition costs, net 8,326  8,649 
Customer relationships, net 12,083  13,607 
Deposits 5,636  6,806 
Renewable energy credit asset 15,296  24,204 
Other current assets 9,090  6,109 
Total current assets 196,757  236,128 
Property and equipment, net 2,867  3,267 
Fair value of derivative assets 75  106 
Customer acquisition costs, net 885  9,845 
Customer relationships, net 8,710  17,767 
Deferred tax assets 26,499  29,865 
Goodwill 120,343  120,343 
Other assets 4,992  5,647 
Total assets $ 361,128  $ 422,968 
Liabilities, Series A Preferred Stock and Stockholders' Equity
Current liabilities:
Accounts payable $ 29,360  $ 48,245 
Accounts payable—affiliates 355  1,009 
Accrued liabilities 28,682  37,941 
Renewable energy credit liability 20,179  33,120 
Fair value of derivative liabilities 3,405  19,943 
Other current liabilities 1,308  1,697 
Total current liabilities 83,289  141,955 
Long-term liabilities:
Fair value of derivative liabilities 459  495 
Long-term portion of Senior Credit Facility 100,000  123,000 
Other long-term liabilities 51  217 
Total liabilities 183,799  265,667 
Commitments and contingencies (Note 12)
Series A Preferred Stock, par value $0.01 per share, 20,000,000 shares authorized, 3,707,256 shares issued and 3,567,543 shares outstanding at September 30, 2020 and 3,707,256 shares issued and 3,677,318 shares outstanding at December 31, 2019
87,288  90,015 
Stockholders' equity:
       Common Stock:
Class A common stock, par value $0.01 per share, 120,000,000 shares authorized, 14,771,878 shares issued and 14,627,284 shares outstanding at September 30, 2020 and 14,478,999 shares issued and 14,379,553 shares outstanding at December 31, 2019
148  145 
Class B common stock, par value $0.01 per share, 60,000,000 shares authorized, 20,800,000 shares issued and outstanding at September 30, 2020 and 20,800,000 shares issued and outstanding at December 31, 2019
209  209 
       Additional paid-in capital 54,169  51,842 
       Accumulated other comprehensive loss (40) (40)
       Retained earnings 12,284  1,074 
       Treasury stock, at cost, 144,594 shares at September 30, 2020 and 99,446 shares at December 31, 2019
(2,406) (2,011)
       Total stockholders' equity 64,364  51,219 
Non-controlling interest in Spark HoldCo, LLC 25,677  16,067 
       Total equity 90,041  67,286 
Total liabilities, Series A Preferred Stock and Stockholders' equity $ 361,128  $ 422,968 

The accompanying notes are an integral part of the condensed consolidated financial statements.
3
Table of Contents
SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Revenues:
Retail revenues $ 141,188  $ 207,341  $ 436,166  $ 625,300 
Net asset optimization (expense) revenues (558) (254) (319) 2,242 
Total Revenues 140,630  207,087  435,847  627,542 
Operating Expenses:
Retail cost of revenues 85,118  123,867  269,546  477,881 
General and administrative 19,080  27,629  66,087  94,352 
Depreciation and amortization 7,278  9,496  24,084  31,963 
Total Operating Expenses 111,476  160,992  359,717  604,196 
Operating income 29,154  46,095  76,130  23,346 
Other (expense)/income:
Interest expense (1,487) (2,174) (4,233) (6,392)
Interest and other income 80  322  293  1,005 
Total other expenses (1,407) (1,852) (3,940) (5,387)
Income before income tax expense 27,747  44,243  72,190  17,959 
Income tax expense 5,141  6,567  12,739  3,022 
Net income $ 22,606  $ 37,676  $ 59,451  $ 14,937 
Less: Net income attributable to non-controlling interests 12,993  22,142  34,200  5,736 
Net income attributable to Spark Energy, Inc. stockholders $ 9,613  $ 15,534  $ 25,251  $ 9,201 
Less: Dividends on Series A Preferred Stock 1,951  2,026  5,490  6,080 
Net income attributable to stockholders of Class A common stock $ 7,662  $ 13,508  $ 19,761  $ 3,121 
Other comprehensive income, net of tax:
Currency translation loss $ —  $ (45) $ —  $ (143)
Other comprehensive loss —  (45) —  (143)
Comprehensive income $ 22,606  $ 37,631  $ 59,451  $ 14,794 
Less: Comprehensive income attributable to non-controlling interests 12,993  22,116  34,200  5,652 
Comprehensive income attributable to Spark Energy, Inc. stockholders $ 9,613  $ 15,515  $ 25,251  $ 9,142 
Net income attributable to Spark Energy, Inc. per share of Class A common stock
       Basic $ 0.52  $ 0.94  $ 1.36  $ 0.22 
       Diluted $ 0.52  $ 0.93  $ 1.35  $ 0.22 
Weighted average shares of Class A common stock outstanding
       Basic 14,653  14,380  14,531  14,254 
       Diluted 14,671  14,514  14,655  14,429 

The accompanying notes are an integral part of the condensed consolidated financial statements.
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SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(in thousands)
(unaudited)
Nine Months Ended September 30, 2020
Issued Shares of Class A Common Stock Issued Shares of Class B Common Stock Treasury Stock Class A Common Stock Class B Common Stock Treasury Stock Accumulated Other Comprehensive Loss Additional Paid-in Capital Retained Earnings (Deficit) Total Stockholders' Equity Non-controlling Interest Total Equity
Balance at December 31, 2019 14,479  20,800  (99) $ 145  $ 209  $ (2,011) $ (40) $ 51,842  $ 1,074  $ 51,219  $ 16,067  $ 67,286 
Impact of adoption of ASC 326
—  —  —  —  —  —  —  —  (633) (633) —  (633)
Balance at January 1, 2020 14,479  20,800  (99) 145  209  (2,011) (40) 51,842  441  50,586  16,067  66,653 
Stock based compensation —  —  —  —  —  —  2,061  —  2,061  —  2,061 
Restricted stock unit vesting 293  —  —  3  —  —  —  (915) —  (912) —  (912)
Consolidated net income —  —  —  —  —  —  —  —  25,251  25,251  34,200  59,451 
Distributions paid to non-controlling unit holders —  —  —  —  —  —  —  —  —  —  (23,409) (23,409)
Dividends paid to Class A common stockholders ($0.54375 per share)
—  —  —  —  —  —  —  —  (7,917) (7,917) —  (7,917)
Dividends paid to Preferred Stockholders —  —  —  —  —  —  —  —  (5,491) (5,491) —  (5,491)
Treasury Shares —  —  (45) —  —  (395) — — (395) — (395)
Changes in ownership interest —  —  —  —  —  —  —  1,181  —  1,181  (1,181) — 
Balance at September 30, 2020 14,772  20,800  (144) $ 148  $ 209  $ (2,406) $ (40) $ 54,169  $ 12,284  $ 64,364  $ 25,677  $ 90,041 














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Three Months Ended September 30, 2020
Issued Shares of Class A Common Stock Issued Shares of Class B Common Stock Treasury Stock Class A Common Stock Class B Common Stock Treasury Stock Accumulated Other Comprehensive Loss Additional Paid-in Capital Retained Earnings (Deficit) Total Stockholders' Equity Non-controlling Interest Total Equity
Balance at June 30, 2020
14,772 20,800 (99) $ 148  $ 209  $ (2,011) $ (40) $ 53,409  $ 7,275  $ 58,990  $ 22,829  $ 81,819 
Stock based compensation — — — — — — — 289 — 289 — 289
Restricted stock unit vesting — — — — — — — — — — — —
Consolidated net income — — — — — — — — 9,613 9,613 12,993 22,606
Distributions paid to non-controlling unit holders — — — — — — — — — — (9,674) (9,674)
Dividends paid to Class A common stockholders ($0.18125 per share)
— — — — — — — — (2,652) (2,652) — (2,652)
Dividends paid to Preferred Stockholders — — — — — — — — (1,952) (1,952) — (1,952)
Treasury Shares — — (45) — — (395) — — — (395) — (395)
Changes in Ownership Interest — — — — — — — 471 — 471 (471) —
Balance at September 30, 2020 14,772 20,800 (144) $ 148  $ 209  $ (2,406) $ (40) $ 54,169  $ 12,284  $ 64,364  $ 25,677  $ 90,041 















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Nine Months Ended September 30, 2019
Issued Shares of Class A Common Stock Issued Shares of Class B Common Stock Treasury Stock Class A Common Stock Class B Common Stock Treasury Stock Accumulated Other Comprehensive Loss Additional Paid-in Capital Retained Earnings (Deficit) Total Stockholders' Equity Non-controlling Interest Total Equity
Balance at December 31, 2018
14,178  20,800  (99) $ 142  $ 209  $ (2,011) $ 2  $ 46,157  $ 1,307  $ 45,806  $ 44,488  $ 90,294 
Stock based compensation —  —  —  —  —  —  —  3,888  —  3,888  —  3,888 
Restricted stock unit vesting 301  —  —  3  —  —  —  (1,107) —  (1,104) —  (1,104)
Consolidated net income —  —  —  —  —  —  —  —  9,201  9,201  5,736  14,937 
Foreign currency translation adjustment for equity method investee —  —  —  —  —  —  (59) —  —  (59) (84) (143)
Gain on settlement of TRA, net of tax —  —  —  —  —  —  —  12,179  —  12,179  —  12,179 
Distributions paid to non-controlling unit holders —  —  —  —  —  —  —  —  —  —  (28,108) (28,108)
Dividends paid to Class A common stockholders ($0.54375 per share)
—  —  —  —  —  —  —  (5,170) (2,606) (7,776) —  (7,776)
Changes in ownership interest —  —  —  —  —  —  —  (223) —  (223) 223  — 
Dividends to Preferred Stockholders —  —  —  —  —  —  —  (2,029) (4,053) (6,082) —  (6,082)
Proceeds from disgorgement of stockholder short-swing profits —  —  —  —  —  —  —  55  —  55  —  55 
Acquisition of Customers from Affiliate —  —  —  —  —  —  —  —  —  —  (10) (10)
Balance at September 30, 2019
14,479  20,800  (99) $ 145  $ 209  $ (2,011) $ (57) $ 53,750  $ 3,849  $ 55,885  $ 22,245  $ 78,130 




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Three Months Ended September 30, 2019
Issued Shares of Class A Common Stock Issued Shares of Class B Common Stock Treasury Stock Class A Common Stock Class B Common Stock Treasury Stock Accumulated Other Comprehensive Loss Additional Paid-in Capital Retained Earnings (Deficit) Total Stockholders' Equity Non-controlling Interest Total Equity
Balance at June 30, 2019
14,479  20,800  (99) $ 145  $ 209  $ (2,011) $ (38) $ 42,329  $ (7,053) $ 33,581  $ 18,124  $ 51,705 
Stock based compensation —  —  —  —  —  —  —  1,377  —  1,377  —  1,377 
Consolidated Net income —  —  —  —  —  —  —  —  15,534  15,534  22,142  37,676 
Foreign currency translation adjustment for equity method investee —  —  —  —  —  —  (19) —  —  (19) (26) (45)
Gain on settlement of TRA, net of tax —  —  —  —  —  —  —  12,179  —  12,179  —  12,179 
Distributions paid to non-controlling unit holders —  —  —  —  —  —  —  —  —  —  (20,130) (20,130)
Dividends paid to Class A common stockholders ($0.18125 per share)
—  —  —  —  —  —  —  —  (2,606) (2,606) —  (2,606)
Dividends to Preferred Stockholders —  —  —  —  —  —  —  —  (2,026) (2,026) —  (2,026)
Changes in ownership interest —  —  —  —  —  —  —  (2,135) —  (2,135) 2,135  — 
Balance at September 30, 2019 14,479  20,800  (99) $ 145  $ 209  $ (2,011) $ (57) $ 53,750  $ 3,849  $ 55,885  $ 22,245  $ 78,130 
The accompanying notes are an integral part of the condensed consolidated financial statements.
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SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
  
Nine Months Ended September 30,
   2020 2019
Cash flows from operating activities:
Net income $ 59,451  $ 14,937 
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization expense 24,084  31,965 
Deferred income taxes 3,366  34 
Stock based compensation 2,134  4,053 
Amortization of deferred financing costs 966  1,002 
Bad debt expense 4,613  9,185 
Loss on derivatives, net 14,015  42,690 
Current period cash settlements on derivatives, net (32,682) (32,593)
Other —  (608)
Changes in assets and liabilities:
Decrease in accounts receivable 44,579  40,008 
(Increase) decrease in accounts receivable—affiliates (2,546) 1,139 
Decrease in inventory 1,158  298 
Increase in customer acquisition costs (1,763) (13,608)
Decrease in prepaid and other current assets 6,268  9,211 
Increase in other assets (316) (394)
Decrease in accounts payable and accrued liabilities (39,997) (27,721)
Decrease in accounts payable—affiliates (655) (2,114)
Increase (decrease) in other current liabilities 1,439  (374)
Decrease in other non-current liabilities (166) (25)
Net cash provided by operating activities 83,948  77,085 
Cash flows from investing activities:
Purchases of property and equipment (1,219) (577)
Acquisition of Customers from Affiliate —  (5,913)
Net cash used in investing activities (1,219) (6,490)
Cash flows from financing activities:
Buyback of Series A Preferred Stock (2,282) (111)
Borrowings on notes payable 420,000  224,500 
Payments on notes payable (443,000) (245,000)
Net borrowings on subordinated debt facility —  504 
Payments on the Verde promissory note —  (2,036)
Proceeds from disgorgement of stockholders short-swing profits —  55 
Purchase of Treasury Stock (395) — 
Restricted stock vesting (1,107) (1,348)
Payment for acquired customers (972) — 
Payment of Tax Receivable Agreement liability —  (11,239)
Payment of dividends to Class A common stockholders (7,917) (7,776)
Payment of distributions to non-controlling unitholders (23,409) (28,108)
Payment of Preferred Stock dividends (5,935) (6,082)
Payment to affiliates for acquisition of customer book —  (10)
Net cash used in financing activities (65,017) (76,651)
Increase (decrease) in Cash, cash equivalents and Restricted cash 17,712  (6,056)
Cash, cash equivalents and Restricted cash—beginning of period 57,668  49,638 
Cash, cash equivalents and Restricted cash—end of period $ 75,380  $ 43,582 
Supplemental Disclosure of Cash Flow Information:
Non-cash items:
        Property and equipment purchase accrual $ 5  $ 89 
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        Holdback for Verde Note—Indemnified Matters $ —  $ 4,900 
        Write-off of tax benefit related to tax receivable agreement liability—affiliates $ —  $ 4,157 
        Gain on settlement of tax receivable agreement liability—affiliates $ —  $ (16,336)
Cash paid during the period for:
Interest $ 3,198  $ 5,245 
Taxes $ 13,074  $ 5,097 
The accompanying notes are an integral part of the condensed consolidated financial statements.
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SPARK ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Formation and Organization
Organization

We are an independent retail energy services company that provides residential and commercial customers in competitive markets across the United States with an alternative choice for natural gas and electricity. Spark Energy, Inc. (the "Company") is a holding company whose sole material asset consists of units in Spark HoldCo, LLC (“Spark HoldCo”). The Company is the sole managing member of Spark HoldCo, is responsible for all operational, management and administrative decisions relating to Spark HoldCo’s business and consolidates the financial results of Spark HoldCo and its subsidiaries. Spark HoldCo is the direct and indirect owner of the subsidiaries through which we operate. We conduct our business through several brands across our service areas, including Electricity Maine, Electricity N.H., Major Energy, Provider Power Massachusetts, Respond Power, Spark Energy, and Verde Energy.
2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC") as it applies to interim financial statements. This information should be read along with our consolidated financial statements and notes contained in our annual report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). Our unaudited condensed consolidated financial statements are presented on a consolidated basis and include all wholly-owned and controlled subsidiaries. We account for investments over which we have significant influence but not a controlling financial interest using the equity method of accounting. All significant intercompany transactions and balances have been eliminated in the unaudited condensed consolidated financial statements.

In the opinion of the Company's management, the accompanying condensed consolidated financial statements reflect all adjustments that are necessary to fairly present the financial position, the results of operations, the changes in equity and the cash flows of the Company for the respective periods. Such adjustments are of a normal recurring nature, unless otherwise disclosed.

Use of Estimates and Assumptions
The preparation of our condensed consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim financial statements and the reported amounts of revenues and expenses during the period. Actual results could materially differ from those estimates.

Restricted Cash

As part of the acquisition of residential customer equivalents (“RCEs") from Starion Energy, Inc., Starion NY Inc. and Starion Energy PA Inc. (collectively "Starion") in 2018, we funded an escrow account, the balance of which is reflected as restricted cash in our consolidated balance sheet. As of September 30, 2020 and December 31, 2019, the balance in the escrow account related to the Starion acquisition was less than $0.1 million and $1.0 million, respectively. Approximately $1.0 million was released to the seller in July 2020 related to holdback amounts for acquired customers, subject to the terms of the asset purchase agreement. As of September 30, 2020, the balance remaining in escrow represents the amounts pending settlement between the Company and the seller.

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Relationship with our Founder and Majority Shareholder

W. Keith Maxwell, III (our "Founder") is the owner of a majority of the voting power of our common stock through his ownership of NuDevco Retail, LLC ("NuDevco Retail") and Retailco, LLC ("Retailco"). Retailco is a wholly owned subsidiary of TxEx Energy Investments, LLC ("TxEx"), which is wholly owned by Mr. Maxwell. NuDevco Retail is a wholly owned subsidiary of NuDevco Retail Holdings LLC ("NuDevco Retail Holdings"), which is a wholly owned subsidiary of Electric HoldCo, LLC, which is also a wholly owned subsidiary of TxEx.

On November 2, 2020, the Board of Directors (the "Board") of the Company appointed W. Keith Maxwell III as Chief Executive Officer.

New Accounting Standards Recently Adopted

There have been no changes to our significant accounting policies as disclosed in our 2019 Form 10-K, except as follows:

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 requires entities to use a current expected credit loss ("CECL") model, which is a new impairment model based on expected losses rather than incurred losses on financial assets, including trade accounts receivables. The model requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted ASU 2016-13 and the related amendments effective January 1, 2020, and the adoption resulted in $0.6 million adjustment to retained earnings on January 1, 2020.

Standards Being Evaluated/Standards Not Yet Adopted

Below are accounting standards that have been issued by the FASB but have not yet been adopted by the Company at September 30, 2020. The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes ("ASU 2019-12"). These amendments simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We do not expect adoption of the new standard to have a material impact to our consolidated statement of operations.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We do not expect adoption of the new standard to have a material impact to our consolidated statement of operations.

3. Revenues
Our revenues are derived primarily from the sale of natural gas and electricity to customers, including affiliates. Revenue is measured based upon the quantity of gas or power delivered at prices contained or referenced in the customer's contract, and excludes any sales incentives (e.g. rebates) and amounts collected on behalf of third parties (e.g. sales tax).
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Our revenues also include asset optimization activities. Asset optimization activities consist primarily of purchases and sales of gas that meet the definition of trading activities per FASB ASC Topic 815, Derivatives and Hedging. They are therefore excluded from the scope of FASB ASC Topic 606, Revenue from Contracts with Customers.

Revenues for electricity and natural gas sales are recognized under the accrual method when our performance obligation to a customer is satisfied, which is the point in time when the product is delivered and control of the product passes to the customer. Electricity and natural gas products may be sold as fixed-price or variable-price products. The typical length of a contract to provide electricity and/or natural gas is twelve months. Customers are billed and typically pay at least monthly, based on usage. Electricity and natural gas sales that have been delivered but not billed by period end are estimated and recorded as accrued unbilled revenues based on estimates of customer usage since the date of the last meter read provided by the utility. Volume estimates are based on forecasted volumes and estimated residential and commercial customer usage. Unbilled revenues are calculated by multiplying these volume estimates by the applicable rate by customer class (residential or commercial). Estimated amounts are adjusted when actual usage is known and billed.

The following table discloses revenue by primary geographical market, customer type, and customer credit risk profile (in thousands). The table also includes a reconciliation of the disaggregated revenue to revenue by reportable segment (in thousands).
Reportable Segments
Three Months Ended September 30, 2020 Three Months Ended September 30, 2019
Retail Electricity Retail Natural Gas Total Reportable Segments Retail Electricity Retail Natural Gas Total Reportable Segments
Primary markets (a)
  New England $ 46,464  $ 1,361  $ 47,825  $ 76,995  $ 1,631  $ 78,626 
  Mid-Atlantic 46,878  2,243  49,121  69,763  2,940  72,703 
  Midwest 16,933  1,540  18,473  23,310  2,146  25,456 
  Southwest 22,683  3,086  25,769  26,942  3,614  30,556 
$ 132,958  $ 8,230  $ 141,188  $ 197,010  $ 10,331  $ 207,341 
Customer type
  Commercial $ 34,180  $ 2,705  $ 36,885  $ 69,081  $ 3,378  $ 72,459 
  Residential 103,092  5,082  108,174  134,763  6,696  141,459 
  Unbilled revenue (b) (4,314) 443  (3,871) (6,834) 257  (6,577)
$ 132,958  $ 8,230  $ 141,188  $ 197,010  $ 10,331  $ 207,341 
Customer credit risk
  POR $ 87,439  $ 3,010  $ 90,449  $ 136,683  $ 4,037  $ 140,720 
  Non-POR 45,519  5,220  50,739  60,327  6,294  66,621 
$ 132,958  $ 8,230  $ 141,188  $ 197,010  $ 10,331  $ 207,341 


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Reportable Segments
Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019
Retail Electricity Retail Natural Gas Total Reportable Segments Retail Electricity Retail Natural Gas Total Reportable Segments
Primary markets (a)
New England $ 133,218  $ 11,144  $ 144,362  $ 221,134  $ 13,311  $ 234,445 
Mid-Atlantic 131,463  23,976  155,439  191,077  29,643  220,720 
Midwest 46,428  19,338  65,766  62,890  27,371  90,261 
Southwest 55,872  14,727  70,599  64,777  15,097  79,874 
$ 366,981  $ 69,185  $ 436,166  $ 539,878  $ 85,422  $ 625,300 
Customer type
Commercial $ 103,603  $ 25,512  $ 129,115  $ 196,015  $ 32,079  $ 228,094 
Residential 275,229  53,410  328,639  356,950  64,307  421,257 
Unbilled revenue (b) (11,851) (9,737) (21,588) (13,087) (10,964) (24,051)
$ 366,981  $ 69,185  $ 436,166  $ 539,878  $ 85,422  $ 625,300 
Customer credit risk
POR $ 246,046  $ 34,423  $ 280,469  $ 375,890  $ 45,260  $ 421,150 
Non-POR 120,935  34,762  155,697  163,988  40,162  204,150 
$ 366,981  $ 69,185  $ 436,166  $ 539,878  $ 85,422  $ 625,300 

(a) The primary markets include the following states:

•New England - Connecticut, Maine, Massachusetts, New Hampshire;
•Mid-Atlantic - Delaware, Maryland (including the District of Colombia), New Jersey, New York and Pennsylvania;
•Midwest - Illinois, Indiana, Michigan and Ohio; and
•Southwest - Arizona, California, Colorado, Florida, Nevada, and Texas.

(b) Unbilled revenue is recorded in total until it is actualized, at which time it is categorized between commercial and residential customers.

We record gross receipts taxes on a gross basis in retail revenues and retail cost of revenues. During the three months ended September 30, 2020 and 2019, our retail revenues included gross receipts taxes of $0.3 million and $0.4 million, respectively, and our retail cost of revenues included gross receipts taxes of $1.6 million and $2.2 million, respectively. During the nine months ended September 30, 2020 and 2019, our retail revenues included gross receipts taxes of $1.0 million and $1.1 million, respectively, and our retail cost of revenues included gross receipts taxes of $4.7 million and $6.7 million, respectively.

Accounts receivables and Allowance for Credit Losses

As discussed in Note 2, “Basis of Presentation”, we adopted the new accounting standards for measuring credit losses effective January 1, 2020.

The Company conducts business in many utility service markets where the local regulated utility purchases our receivables, and then becomes responsible for billing the customer and collecting payment from the customer (“POR programs”). These POR programs result in substantially all of the Company’s credit risk being linked to the
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applicable utility, which generally has an investment-grade rating, and not to the end-use customer. The Company monitors the financial condition of each utility and currently believes its receivables are collectible.

In markets that do not offer POR programs or when the Company chooses to directly bill its customers, certain receivables are billed and collected by the Company. The Company bears the credit risk on these accounts and records an appropriate allowance for doubtful accounts to reflect any losses due to non-payment by customers. The Company’s customers are individually insignificant and geographically dispersed in these markets. The Company writes off customer balances when it believes that amounts are no longer collectible and when it has exhausted all means to collect these receivables.

For trade accounts receivables, the Company accrues an allowance for doubtful accounts by business segment by pooling customer accounts receivables based on similar risk characteristics, such as customer type, geography, aging analysis, payment terms, and related macro-economic factors. Expected credit loss exposure is evaluated for each of our accounts receivables pools. Expected credits losses are established using a model that considers historical collections experience, current information, and reasonable and supportable forecasts. The Company writes off accounts receivable balances against the allowance for doubtful accounts when the accounts receivable is deemed to be uncollectible.

A rollforward of our allowance for credit losses for the nine months ended September 30, 2020 are presented in the table below (in thousands):

Balance 12/31/19 $ (4,797)
Impact of adoption of ASC 326 (633)
Current period bad debt provision (3,151)
Write-offs 4,006 
Recovery of previous write offs (581)
Balance 9/30/20 $ (5,156)


4. Equity

Non-controlling Interest

We hold an economic interest and are the sole managing member in Spark HoldCo, with affiliates of our Founder, majority shareholder and Chief Executive Officer holding the remaining economic interests in Spark HoldCo. As a result, we consolidate the financial position and results of operations of Spark HoldCo, and reflect the economic interests owned by these affiliates as a non-controlling interest. The Company and affiliates owned the following economic interests in Spark HoldCo at September 30, 2020 and December 31, 2019, respectively.
The Company Affiliated Owners
September 30, 2020 41.53  % 58.47  %
December 31, 2019 41.04  % 58.96  %

The following table summarizes the portion of net income (loss) and income tax expense (benefit) attributable to non-controlling interest (in thousands):

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Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
     
Net income allocated to non-controlling interest $ 14,909  $ 25,003  $ 38,717  $ 7,108 
Income tax expense allocated to non-controlling interest 1,916  2,861  4,517  1,372 
Net income attributable to non-controlling interest $ 12,993  $ 22,142  $ 34,200  $ 5,736 

Class A Common Stock and Class B Common Stock

Holders of the Company's Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or by our certificate of incorporation.

Dividends declared for the Company's Class A common stock are reported as a reduction of retained earnings, or a reduction of additional paid in capital to the extent retained earnings are exhausted. During the nine months ended September 30, 2020, we paid $7.9 million in dividends to the holders of the Company's Class A common stock. This dividend represented a quarterly rate of $0.18125 per share on each share of Class A common stock.

In order to pay our stated dividends to holders of our Class A common stock, our subsidiary, Spark HoldCo is required to make corresponding distributions to holders of its units, including those holders that own our Class B common stock (our non-controlling interest holder). As a result, during the nine months ended September 30, 2020, Spark HoldCo made corresponding distributions of $11.3 million to our non-controlling interest holders.

Share Repurchase Program

On August 18, 2020, our Board of Directors authorized a share repurchase program of up to $20.0 million of Class A common stock through August 18, 2021. We are funding the program through available cash balances, our Senior Credit Facility and operating cash flows.

The shares of Class A common stock may be repurchased from time to time in the open market at prevailing market prices or in privately negotiated transactions based on ongoing assessments of capital needs, the market price of the stock, and other factors, including general market conditions. The repurchase program does not obligate us to acquire any particular amount of Class A common stock, may be modified or suspended at any time, and could be terminated prior to completion.

During the three and nine months ended September 30, 2020, we repurchased 45,148 shares of our Class A common stock at a weighted average price of $8.75 per share, for a total cost of $0.4 million.

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income attributable to stockholders (the numerator) by the weighted-average number of Class A common shares outstanding for the period (the denominator). Class B common shares are not included in the calculation of basic earnings per share because they are not participating securities and have no economic interests. Diluted earnings per share is similarly calculated except that the denominator is increased by potentially dilutive securities.

The following table presents the computation of basic and diluted income (loss) per share for the three and nine months ended September 30, 2020 and 2019 (in thousands, except per share data):
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Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Net income attributable to Spark Energy, Inc. stockholders $ 9,613  $ 15,534  $ 25,251  $ 9,201 
Less: Dividends on Series A preferred stock 1,951  2,026  5,490  6,080 
Net income attributable to stockholders of Class A common stock $ 7,662  $ 13,508  $ 19,761  $ 3,121 
Basic weighted average Class A common shares outstanding 14,653  14,380  14,531  14,254 
Basic income per share attributable to stockholders $ 0.52  $ 0.94  $ 1.36  $ 0.22 
Net income attributable to stockholders of Class A common stock $ 7,662  $ 13,508  $ 19,761  $ 3,121 
Effect of conversion of Class B common stock to shares of Class A common stock —  —  —  — 
Diluted net income attributable to stockholders of Class A common stock $ 7,662  $ 13,508  $ 19,761  $ 3,121 
Basic weighted average Class A common shares outstanding 14,653  14,380  14,531  14,254 
Effect of dilutive Class B common stock —  —  —  — 
Effect of dilutive restricted stock units 18  134  124  175 
Diluted weighted average shares outstanding 14,671  14,514  14,655  14,429 
Diluted income per share attributable to stockholders $ 0.52  $ 0.93  $ 1.35  $ 0.22 

The computation of diluted earnings per share for the three and nine months ended September 30, 2020 excludes 20.8 million shares of Class B common stock because the effect of their conversion was antidilutive. The Company's outstanding shares of Series A Preferred Stock were not included in the calculation of diluted earnings per share because they contain only contingent redemption provisions that have not occurred.

Variable Interest Entity

Spark HoldCo is a variable interest entity due to its lack of rights to participate in significant financial and operating decisions and its inability to dissolve or otherwise remove its management. Spark HoldCo owns all of the outstanding membership interests in each of our operating subsidiaries. We are the sole managing member of Spark HoldCo, manage Spark HoldCo's operating subsidiaries through this managing membership interest, and are considered the primary beneficiary of Spark HoldCo. The assets of Spark HoldCo cannot be used to settle our obligations except through distributions to us, and the liabilities of Spark HoldCo cannot be settled by us except through contributions to Spark HoldCo. The following table includes the carrying amounts and classification of the assets and liabilities of Spark HoldCo that are included in our condensed consolidated balance sheet as of September 30, 2020 and December 31, 2019 (in thousands):
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September 30, 2020 December 31, 2019
Assets
Current assets:
   Cash and cash equivalents $ 75,248  $ 56,598 
   Accounts receivable 63,810  113,635 
   Other current assets 53,881  64,476 
   Total current assets 192,939  234,709 
Non-current assets:
   Goodwill 120,343  120,343 
   Other assets 19,390  37,826 
   Total non-current assets 139,733  158,169 
   Total Assets $ 332,672  $ 392,878 
Liabilities
Current liabilities:
   Accounts payable and accrued liabilities $ 58,004  $ 86,097 
   Other current liabilities 43,015  65,863 
   Total current liabilities 101,019  151,960 
Long-term liabilities:
   Long-term portion of Senior Credit Facility 100,000  123,000 
   Other long-term liabilities 511  712 
   Total long-term liabilities 100,511  123,712 
   Total Liabilities $ 201,530  $ 275,672 

5. Preferred Stock

In May 2019, we commenced a share repurchase program (the "Repurchase Program") of our Series A Preferred Stock. The Repurchase Program allowed us to purchase our Series A Preferred Stock through May 20, 2020, and there was no dollar limit on the amount of Series A Preferred Stock that may be repurchased, nor did the Repurchase Program obligate the Company to make any repurchases.

In November 2019, we amended and extended our Repurchase Program of our Series A Preferred Stock. The Repurchase Program allows us to purchase Series A Preferred Stock through December 31, 2020, at prevailing prices, in open market or negotiated transactions, subject to market conditions, maximum share prices and other considerations. The Repurchase Program does not obligate us to make any repurchases and may be suspended at any time.

In May 2020, we initiated a tender offer to purchase up to 1,000,000 shares of our Series A Preferred Stock. In June 2020, we accepted for purchase 36,827 shares of the Series A Preferred Stock at a purchase price of $22.00 per share, for an aggregate purchase price of approximately $0.8 million.

During the three months ended September 30, 2020, there were no repurchases of Series A Preferred Stock. During the nine months ended September 30, 2020, we repurchased 109,775 shares of Series A Preferred Stock at a weighted-average price of $20.79 per share (including shares purchased through the tender offer described above), for a total cost of approximately $2.3 million.

Holders of the Series A Preferred Stock have no voting rights, except in specific circumstances of delisting or in the case the dividends are in arrears as specified in the Series A Preferred Stock Certificate of Designations. The Series A Preferred Stock accrue dividends at an annual percentage rate of 8.75%, and the liquidation preference provisions of the Series A Preferred Stock are considered contingent redemption provisions because there are rights granted to
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the holders of the Series A Preferred Stock that are not solely within our control upon a change in control of the Company. Accordingly, the Series A Preferred Stock is presented between liabilities and the equity sections in the accompanying condensed consolidated balance sheet.

During the three and nine months ended September 30, 2020, we paid $2.0 million and $6.0 million in dividends to holders of the Series A Preferred Stock. As of September 30, 2020, we had accrued $1.9 million related to dividends to holders of the Series A Preferred Stock. This dividend was paid on October 15, 2020.

A summary of our preferred equity balance for the nine months ended September 30, 2020 is as follows:
(in thousands)
Balance at December 31, 2019 $ 90,015 
Accumulated dividends on Series A Preferred Stock (60)
Repurchase of Series A Preferred Stock (2,667)
Balance at September 30, 2020 $ 87,288 

6. Derivative Instruments

We are exposed to the impact of market fluctuations in the price of electricity and natural gas, basis differences in the price of natural gas, storage charges, renewable energy credits ("RECs"), and capacity charges from independent system operators. We use derivative instruments in an effort to manage our cash flow exposure to these risks. These instruments are not designated as hedges for accounting purposes, and, accordingly, changes in the market value of these derivative instruments are recorded in the cost of revenues. As part of our strategy to optimize pricing in our natural gas related activities, we also manage a portfolio of commodity derivative instruments held for trading purposes. Our commodity trading activities are subject to limits within our Risk Management Policy. For these derivative instruments, changes in the fair value are recognized currently in earnings in net asset optimization revenues.
Derivative assets and liabilities are presented net in our condensed consolidated balance sheets when the derivative instruments are executed with the same counterparty under a master netting arrangement. Our derivative contracts include transactions that are executed both on an exchange and centrally cleared, as well as over-the-counter, bilateral contracts that are transacted directly with third parties. To the extent we have paid or received collateral related to the derivative assets or liabilities, such amounts would be presented net against the related derivative asset or liability’s fair value. As of September 30, 2020 we had received $0.2 million and paid less than $0.1 million in collateral. As of December 31, 2019 we had paid $1.7 million in collateral. The specific types of derivative instruments we may execute to manage the commodity price risk include the following:

•Forward contracts, which commit us to purchase or sell energy commodities in the future;
•Futures contracts, which are exchange-traded standardized commitments to purchase or sell a commodity or financial instrument;
•Swap agreements, which require payments to or from counterparties based upon the differential between two prices for a predetermined notional quantity; and
•Option contracts, which convey to the option holder the right but not the obligation to purchase or sell a commodity.

The Company has entered into other energy-related contracts that do not meet the definition of a derivative instrument or for which we made a normal purchase, normal sale election and are therefore not accounted for at fair value including the following:

•Forward electricity and natural gas purchase contracts for retail customer load;
•Renewable energy credits; and
•Natural gas transportation contracts and storage agreements.
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Volumes Underlying Derivative Transactions
The following table summarizes the net notional volumes of our open derivative financial instruments accounted for at fair value by commodity. Positive amounts represent net buys while bracketed amounts are net sell transactions (in thousands):
Non-trading 
Commodity Notional September 30, 2020 December 31, 2019
Natural Gas MMBtu 2,484  6,130 
Natural Gas Basis MMBtu —  42 
Electricity MWh 2,391  6,015 
Trading
Commodity Notional September 30, 2020 December 31, 2019
Natural Gas MMBtu 134  204 

Gains (Losses) on Derivative Instruments
Gains (losses) on derivative instruments, net and current period settlements on derivative instruments were as follows for the periods indicated (in thousands):

Three Months Ended September 30,
   2020 2019
Gain on non-trading derivatives, net $ 2,550  $ 12,528 
Loss on trading derivatives, net (99) (221)
Gain on derivatives, net 2,451  12,307 
Current period settlements on non-trading derivatives $ 6,489  $ 12,764 
Current period settlements on trading derivatives (64) (43)
Total current period settlements on derivatives $ 6,425  $ 12,721 

Nine Months Ended September 30,
   2020 2019
Loss on non-trading derivatives, net $ (14,019) $ (42,741)
Gain on trading derivatives, net 4  51 
Loss on derivatives, net (14,015) (42,690)
Current period settlements on non-trading derivatives (1)
$ 33,153  $ 33,677 
Current period settlements on trading derivatives (156) (162)
Total current period settlements on derivatives $ 32,997  $ 33,515 
(1) Excludes settlements of $(0.3) million and $(0.9) million, respectively, for the nine months ended September 30, 2020 and 2019 related to power call options.
Gains (losses) on trading derivative instruments are recorded in net asset optimization revenues and gains (losses) on non-trading derivative instruments are recorded in retail cost of revenues on the condensed consolidated statements of operations.
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Fair Value of Derivative Instruments
The following tables summarize the fair value and offsetting amounts of our derivative instruments by counterparty and collateral received or paid (in thousands):
  
September 30, 2020
Description Gross Assets Gross
Amounts
Offset 		Net Assets Cash
Collateral
Offset 		Net Amount
Presented
Non-trading commodity derivatives $ 3,747  $ (2,859) $ 888  $ (182) $ 706 
Trading commodity derivatives 87  (32) 55  —  55 
Total Current Derivative Assets 3,834  (2,891) 943  (182) 761 
Non-trading commodity derivatives 255  (180) 75  —  75 
Trading commodity derivatives —  —  —  —  — 
Total Non-current Derivative Assets 255  (180) 75  —  75 
Total Derivative Assets $ 4,089  $ (3,071) $ 1,018  $ (182) $ 836 
September 30, 2020
Description Gross 
Liabilities 		Gross
Amounts
Offset 		Net
Liabilities 		Cash
Collateral
Offset 		Net Amount
Presented
Non-trading commodity derivatives $ (8,598) $ 5,204  $ (3,394) $ 21  $ (3,373)
Trading commodity derivatives (32) —  (32) —  (32)
Total Current Derivative Liabilities (8,630) 5,204  (3,426) 21  (3,405)
Non-trading commodity derivatives (501) 42  (459) —  (459)
Trading commodity derivatives —  —  —  —  — 
Total Non-current Derivative Liabilities (501) 42  (459) —  (459)
Total Derivative Liabilities $ (9,131) $ 5,246  $ (3,885) $ 21  $ (3,864)
  
December 31, 2019
Description Gross Assets Gross
Amounts
Offset 		Net Assets Cash
Collateral
Offset 		Net Amount
Presented
Non-trading commodity derivatives $ 570  $ (275) $ 295  $ —  $ 295 
Trading commodity derivatives 170  (1) 169  —  169 
Total Current Derivative Assets 740  (276) 464  —  464 
Non-trading commodity derivatives 333  (227) 106  —  106 
Trading commodity derivatives —  —  —  —  — 
Total Non-current Derivative Assets 333  (227) 106  —  106 
Total Derivative Assets $ 1,073  $ (503) $ 570  $ —  $ 570 
December 31, 2019
Description Gross 
Liabilities 		Gross
Amounts
Offset 		Net
Liabilities 		Cash
Collateral
Offset 		Net Amount
Presented
Non-trading commodity derivatives $ (34,434) $ 12,859  $ (21,575) $ 1,632  $ (19,943)
Trading commodity derivatives (194) 194  —  —  — 
Total Current Derivative Liabilities (34,628) 13,053  (21,575) 1,632  (19,943)
Non-trading commodity derivatives (1,951) 1,422  (529) 34  (495)
Trading commodity derivatives —  —  —  —  — 
Total Non-current Derivative Liabilities (1,951) 1,422  (529) 34  (495)
Total Derivative Liabilities $ (36,579) $ 14,475  $ (22,104) $ 1,666  $ (20,438)
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7. Property and Equipment
Property and equipment consist of the following (in thousands):
Estimated useful
lives (years) 		September 30, 2020 December 31, 2019
Information technology
2 – 5
$ 23,229  $ 22,005 
Furniture and fixtures
2 – 5
1,802  1,802 
Total 25,031  23,807 
Accumulated depreciation (22,164) (20,540)
Property and equipment—net $ 2,867  $ 3,267 
Information technology assets include software and consultant time used in the application, development and implementation of various systems including customer billing and resource management systems. As of each of September 30, 2020 and December 31, 2019, information technology includes $0.5 million and $0.6 million, respectively, of costs associated with assets not yet placed into service.
Depreciation expense recorded in the condensed consolidated statements of operations was $0.4 million and $0.6 million, respectively, for the three months ended September 30, 2020 and 2019 and $1.6 million and $1.8 million for the nine months ended September 30, 2020 and 2019, respectively.
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8. Intangible Assets
Goodwill, customer relationships and trademarks consist of the following amounts (in thousands):
September 30, 2020 December 31, 2019
Goodwill $ 120,343  $ 120,343 
Customer relationships—Acquired
Cost $ 64,083  $ 64,083 
Accumulated amortization (47,300) (40,231)
Customer relationships—Acquired
$ 16,783  $ 23,852 
Customer relationships—Other
Cost $ 17,056  $ 17,056 
Accumulated amortization (13,046) (9,534)
Customer relationships—Other, net
$ 4,010  $ 7,522 
Trademarks
Cost $ 7,570  $ 8,502 
Accumulated amortization (2,694) (2,794)
Trademarks, net $ 4,876  $ 5,708 

Changes in goodwill, customer relationships (including non-compete agreements) and trademarks consisted of the following (in thousands):
Goodwill
Customer Relationships— Acquired
Customer Relationships— Other
Trademarks
Balance at December 31, 2019 $ 120,343  $ 23,852  $ 7,522  $ 5,708 
Additions —  —  —  — 
Amortization —  (7,069) (3,512) (832)
Balance at September 30, 2020 $ 120,343  $ 16,783  $ 4,010  $ 4,876 

Estimated future amortization expense for customer relationships and trademarks at September 30, 2020 is as follows (in thousands):
Year ending December 31,
2020 (remaining three months) $ 3,304 
2021 13,142 
2022 6,194 
2023 605 
2024 404 
> 5 years 2,020 
Total $ 25,669 
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9. Debt
Debt consists of the following amounts as of September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020 December 31, 2019
Long-term debt:
  Senior Credit Facility (1) (2)
$ 100,000  $ 123,000 
Total long-term debt 100,000  123,000 
Total debt $ 100,000  $ 123,000 
(1) As of September 30, 2020 and December 31, 2019, the weighted average interest rate on the Senior Credit Facility was 3.75% and 4.71%, respectively.
(2) As of September 30, 2020 and December 31, 2019, we had $31.8 million and $37.4 million in letters of credit issued, respectively.

Capitalized financing costs associated with our Senior Credit Facility were $1.8 million and $1.3 million as of September 30, 2020 and December 31, 2019, respectively. Of these amounts, $1.0 million and $0.9 million are recorded in other current assets, and $0.8 million and $0.4 million are recorded in other non-current assets in the condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019, respectively.
Interest expense consists of the following components for the periods indicated (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Senior Credit Facility $ 477  $ 1,120  $ 1,904  $ 3,741 
Verde promissory note —  —  —  230 
Letters of credit fees and commitment fees 244  395  1,073  1,253 
Amortization of deferred financing costs
476  497  966  1,002 
Other
290  162  290  166 
Interest Expense
$ 1,487  $ 2,174  $ 4,233  $ 6,392 

Senior Credit Facility

The Company, as guarantor, and Spark HoldCo (the “Borrower” and, together with each subsidiary of Spark HoldCo (“Co-Borrowers”)) maintain a senior secured borrowing base credit facility (as amended from time to time, “Senior Credit Facility”) that allows us to borrow on a revolving basis and has a maximum borrowing capacity of $187.5 million as of September 30, 2020.

Subject to applicable sub-limits and terms of the Senior Credit Facility, borrowings are available for the issuance of letters of credit (“Letters of Credit”), working capital and general purpose revolving credit loans (“Working Capital Loans”), and share buyback loans (“Share Buyback Loans”) for the purpose of funding the repurchase of Class A common stock and Series A Preferred Stock.

Pursuant to the Senior Credit Facility, the Company is entitled to Share Buyback Loans of up to $80.0 million, which permit the Company to repurchase up to an aggregate of 8,000,000 shares of our Class A common stock or $80.0 million of Series A Preferred Stock under Share Buyback Loans (subject to the terms and conditions thereof).

The Senior Credit Facility will mature on July 31, 2022, and all amounts outstanding thereunder will be payable on the maturity date. Borrowings under the Senior Credit Facility may be used to pay fees and expenses in connection with the Senior Credit Facility, finance ongoing working capital requirements and general corporate purpose requirements of the Co-Borrowers, to provide partial funding for acquisitions, as allowed under terms of the Senior Credit Facility, and to make open market purchases of our Class A common stock and Series A Preferred Stock.

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Pursuant to the Senior Credit Facility, the interest rate for Working Capital Loans and Letters of Credit under the Senior Credit Facility is generally determined by reference to the Eurodollar rate plus an applicable margin of up to 3.25% per annum (based on the prevailing utilization) or an alternate base rate plus an applicable margin of up to 2.25% per annum (based on the prevailing utilization). The alternate base rate is equal to the highest of (i) the prime rate (as published in the Wall Street Journal), (ii) the federal funds rate plus 0.50% per annum, or (iii) the reference Eurodollar rate plus 1.00%.

Borrowings under the Senior Credit Facility for Share Buyback Loans, are generally determined by reference to the Eurodollar rate plus an applicable margin of 4.50% per annum or the alternate base rate plus an applicable margin of 3.50% per annum.

The Co-Borrowers pay a commitment fee of 0.50% quarterly in arrears on the unused portion of the Senior Credit Facility. In addition, the Co-Borrowers are subject to additional fees including an upfront fee, an annual agency fee, and letter of credit fees based on a percentage of the face amount of letters of credit payable to any syndicate member that issues a letter of credit.

The Senior Credit Facility contains covenants that, among other things, require the maintenance of specified ratios or conditions including:

•Minimum Fixed Charge Coverage Ratio. We must maintain a minimum fixed charge coverage ratio of not less than 1.25 to 1.00. The Minimum Fixed Charge Coverage Ratio is defined as the ratio of (a) Adjusted EBITDA to (b) the sum of consolidated (with respect to the Company and the Co-Borrowers) interest expense, letter of credit fees, commitment fees, acquisition earn-out payments (excluding earnout payments funded with proceeds from newly issued preferred or common equity), distributions, scheduled amortization payments, and payments made on or after the closing of the Fourth Amendment to the Senior Credit Facility (other than such payments made from escrow accounts which were funded in connection with a permitted acquisition) related to the settlement of civil and regulatory matters if not included in the calculation of Adjusted EBITDA.

•Maximum Total Leverage Ratio. We must maintain a ratio of (x) the sum of total indebtedness (excluding eligible subordinated debt and letter of credit obligations), plus (y) gross amounts reserved for civil and regulatory liabilities identified in SEC filings, to Adjusted EBITDA of no more than 2.50 to 1.00.

•Maximum Senior Secured Leverage Ratio. We must maintain a Senior Secured Leverage Ratio of no more than 1.85 to 1.00. The Senior Secured Leverage Ratio is defined as the ratio of (a) all indebtedness of the loan parties on a consolidated basis that is secured by a lien on any property of any loan party (including the effective amount of all loans then outstanding under the Senior Credit Facility) to (b) Adjusted EBITDA.

The Senior Credit Facility contains various negative covenants that limit our ability to, among other things, incur certain additional indebtedness, grant certain liens, engage in certain asset dispositions, merge or consolidate, make certain payments, distributions, investments, acquisitions or loans, materially modify certain agreements, or enter into transactions with affiliates. The Senior Credit Facility also contains affirmative covenants that are customary for credit facilities of this type. As of September 30, 2020, we were in compliance with our various covenants under the Senior Credit Facility.

The Senior Credit Facility is secured by pledges of the equity of the portion of Spark HoldCo owned by us, the equity of Spark HoldCo’s subsidiaries, the Co-Borrowers’ present and future subsidiaries, and substantially all of the Co-Borrowers’ and their subsidiaries’ present and future property and assets, including accounts receivable, inventory and liquid investments, and control agreements relating to bank accounts.

The Senior Credit Facility contains certain customary representations and warranties and events of default. Events of default include, among other things, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults and cross-acceleration to certain indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments in excess of $5.0 million, certain events with respect to material contracts, and
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actual or asserted failure of any guaranty or security document supporting the Senior Credit Facility to be in full force and effect. A default will also occur if at any time W. Keith Maxwell III ceases to, directly or indirectly, own at least 13,600,000 Class A and Class B shares on a combined basis (to be adjusted for any stock split, subdivisions or other stock reclassification or recapitalization), and a controlling percentage of the voting equity interest of the Company, and certain other changes in control. If such an event of default occurs, the lenders under the Senior Credit Facility would be entitled to take various actions, including the acceleration of amounts due under the facility and all actions permitted to be taken by a secured creditor.

Subordinated Debt Facility

The Company maintains an Amended and Restated Subordinated Promissory Note in the principal amount of up to $25.0 million (the “Subordinated Debt Facility”), by and among the Company, Spark HoldCo and Retailco. The Subordinated Debt Facility matures on December 31, 2021.

The Subordinated Debt Facility allows us to draw advances in increments of no less than $1.0 million per advance up to the maximum principal amount of the Subordinated Debt Facility. Advances thereunder accrue interest at 5% per annum from the date of the advance. We have the right to capitalize interest payments under the Subordinated Debt Facility. The Subordinated Debt Facility is subordinated in certain respects to our Senior Credit Facility pursuant to a subordination agreement. We may pay interest and prepay principal on the Subordinated Debt Facility so long as we are in compliance with the covenants under our Senior Credit Facility, are not in default under the Senior Credit Facility and have minimum availability of $5.0 million under the borrowing base under the Senior Credit Facility. Payment of principal and interest under the Subordinated Debt Facility is accelerated upon the occurrence of certain change of control or sale transactions.

As of September 30, 2020, and December 31, 2019, there were no outstanding borrowings under the Subordinated Debt Facility.

10. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. This includes the credit standing of counterparties involved and the impact of credit enhancements.
We apply fair value measurements to our commodity derivative instruments based on the following fair value hierarchy, which prioritizes the inputs to the valuation techniques used to measure fair value into three broad levels:

•Level 1—Quoted prices in active markets for identical assets and liabilities. Instruments categorized in Level 1 primarily consist of financial instruments such as exchange-traded derivative instruments.
•Level 2—Inputs other than quoted prices recorded in Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means. Instruments categorized in Level 2 primarily include non-exchange traded derivatives such as over-the-counter commodity forwards and swaps and options.
•Level 3—Unobservable inputs for the asset or liability, including situations where there is little, if any, observable market activity for the asset or liability.

As the fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3), the Company maximizes the use of observable inputs and minimizes the use
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of unobservable inputs when measuring fair value. These levels can change over time. In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. In these cases, the lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present assets and liabilities measured and recorded at fair value in our condensed consolidated balance sheets on a recurring basis by and their level within the fair value hierarchy (in thousands):
Level 1 Level 2 Level 3 Total
September 30, 2020        
Non-trading commodity derivative assets $ 167  $ 614  $ —  $ 781 
Trading commodity derivative assets 36  19  —  55 
Total commodity derivative assets $ 203  $ 633  $ —  $ 836 
Non-trading commodity derivative liabilities $ —  $ (3,832) $ —  $ (3,832)
Trading commodity derivative liabilities —  (32) —  (32)
Total commodity derivative liabilities $ —  $ (3,864) $ —  $ (3,864)
Level 1 Level 2 Level 3 Total
December 31, 2019
Non-trading commodity derivative assets $ —  $ 401  $ —  $ 401 
Trading commodity derivative assets —  169  —  169 
Total commodity derivative assets $ —  $ 570  $ —  $ 570 
Non-trading commodity derivative liabilities $ (1,666) $ (18,772) $ —  $ (20,438)
Trading commodity derivative liabilities —  —  —  — 
Total commodity derivative liabilities $ (1,666) $ (18,772) $ —  $ (20,438)
We had no transfers of assets or liabilities between any of the above levels during the nine months ended September 30, 2020 and the year ended December 31, 2019.
Our derivative contracts include exchange-traded contracts valued utilizing readily available quoted market prices and non-exchange-traded contracts valued using market price quotations available through brokers or over-the-counter and on-line exchanges. In addition, in determining the fair value of our derivative contracts, we apply a credit risk valuation adjustment to reflect credit risk, which is calculated based on our or the counterparty’s historical credit risks. As of September 30, 2020 and December 31, 2019, the credit risk valuation adjustment was a reduction of derivative liabilities, net of $0.1 million and $0.2 million, respectively.

11. Income Taxes

Income Taxes

We and our subsidiaries, CenStar and Verde Energy USA, Inc. ("Verde Corp"), are each subject to U.S. federal income tax as corporations. CenStar and Verde Corp file consolidated tax returns in jurisdictions that allow combined reporting. Spark HoldCo and its subsidiaries, with the exception of CenStar and Verde Corp, are treated as flow-through entities for U.S. federal income tax purposes and, as such, are generally not subject to U.S. federal income tax at the entity level. Rather, the tax liability with respect to their taxable income is passed through to their members or partners. Accordingly, we are subject to U.S. federal income taxation on our allocable share of Spark HoldCo’s net U.S. taxable income.

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In our financial statements, we report federal and state income taxes for our share of the partnership income attributable to our ownership in Spark HoldCo and for the income taxes attributable to CenStar and Verde Corp. Net income attributable to non-controlling interest includes the provision for income taxes related to CenStar and Verde Corp.

We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the tax bases of the assets and liabilities. We apply existing tax law and the tax rate that we expect to apply to taxable income in the years in which those differences are expected to be recovered or settled in calculating the deferred tax assets and liabilities. Effects of changes in tax rates on deferred tax assets and liabilities are recognized in income in the period of the tax rate enactment. A valuation allowance is recorded when it is not more likely than not that some or all of the benefit from the deferred tax asset will be realized.

We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, our deferred tax liabilities, the overall business environment, our historical earnings and losses, current industry trends, and our outlook for future years. We believe it is more likely than not that our deferred tax assets will be utilized, and accordingly have not recorded a valuation allowance on these assets.

As of September 30, 2020, we had a net deferred tax asset of $26.5 million, of which approximately $15.6 million related to the original step up in tax basis resulting from the initial purchase of Spark HoldCo units from NuDevco Retail and NuDevco Retail Holdings (predecessor to Retailco) in connection with our initial public offering.

The effective U.S. federal and state income tax rate for the three months ended September 30, 2020 and 2019 was 18.5% and 14.8%, respectively. The effective U.S. federal and state income tax rate for the nine months ended September 30, 2020 and 2019 was 17.6% and 16.8%, respectively. The effective tax rate for the three and nine months ended September 30, 2020 differed from the U.S. federal statutory tax rate of 21% primarily due to state taxes and the benefit provided from Spark HoldCo operating as a limited liability company, which is treated as a partnership for federal and state income tax purposes and is not subject to federal and state income taxes. Accordingly, the portion of earnings attributable to non-controlling interest is subject to tax when reported as a component of the non-controlling interest holders' taxable income.
12. Commitments and Contingencies

From time to time, we may be involved in legal, tax, regulatory and other proceedings in the ordinary course of business. Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.

Legal Proceedings

Below is a summary of our currently pending material legal proceedings. We are subject to lawsuits and claims arising in the ordinary course of our business. The following legal proceedings are in various stages and are subject to substantial uncertainties concerning the outcome of material factual and legal issues. Accordingly, unless otherwise specifically noted, we cannot currently predict the manner and timing of the resolutions of these legal proceedings or estimate a range of possible losses or a minimum loss that could result from an adverse verdict in a potential lawsuit. While the lawsuits and claims are asserted for amounts that may be material should an unfavorable outcome occur, management does not currently expect that any currently pending matters will have a material adverse effect on our financial position or results of operations.

Consumer Lawsuits

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Similar to other energy service companies (“ESCOs”) operating in the industry, from time-to-time, the Company is subject to class action lawsuits in various jurisdictions where the Company sells natural gas and electricity.

Variable Rate Cases

In the cases referred to as Variable Rate Cases, such actions involve consumers alleging they paid higher rates than they would have if they stayed with their default utility. The facts of each case are similar; however, because they have been brought in several different jurisdictions, there is varying applicable case law, and each case is in various stages of progression, the Company agreed to mediate in two aggregated mediations to avoid duplicative defense costs in numerous jurisdictions. The Company continues to deny the allegations asserted by Plaintiffs and intends to vigorously defend these matters.

The August 2020 mediation covered three matters: (1) Janet Rolland et al v. Spark Energy, LLC (D.N.J. Apr. 2017); (2) Burger v. Spark Energy Gas, LLC (N.D. Ill. Dec. 2019); and (3) Local 901 v. Spark Energy, LLC (Sup .Ct. Allen County, Indiana Aug. 2019). Given the ongoing mediation, discovery and current stage of this matters, we cannot predict the outcome of these cases at this time.

The October 2020 mediation covered five matters: (1) Marshall v. Verde Energy USA, Inc. (D.N.J. Jan. 2018); (2) Mercado v. Verde Energy USA, Inc. (N.D. Ill. Mar. 2018); (3) Davis v. Verde Energy USA, Inc., et al. (D. Mass. Apr. 2019); (4) LaQua v. Verde Energy USA New York, LLC (E.D.N.Y. Jan. 2020); and (5) Abbate v. Verde Energy USA Ohio, LLC (S.D. Ohio Jun. 2020). Given the ongoing mediation, discovery and current stage of these matters, we cannot predict the outcome of these cases at this time.

Advertising Case

Katherine Veilleux, et. al. v. Electricity Maine LLC, Provider Power, LLC, Spark HoldCo, LLC, Kevin Dean, and Emile Clavet was a purported class action lawsuit filed on November 18, 2016 in the United States District Court of Maine, alleging that Electricity Maine, LLC (“Electricity Maine”), an entity acquired by Spark Holdco in mid-2016, enrolled customers and conducted advertising, and promotions allegedly not in compliance with law. Plaintiffs sought damages for themselves and the purported class, injunctive relief, restitution, and attorneys' fees. The parties participated in mediation in July 2019 and reached a settlement. The court granted final approval of that settlement in mid-October 2020. The claims period closed September 10, 2020 and customer claims will be processed by year end, closing this matter.

Corporate Matter Lawsuits

Saul Horowitz, as Sellers’ Representative for the former owners of the Major Energy Companies v. National Gas & Electric, LLC (“NG&E”) and Spark Energy, Inc., is a lawsuit filed on October 17, 2017 in the United States District Court for the Southern District of New York asserting claims of fraudulent inducement against NG&E, breach of contract against NG&E and Spark, and tortious interference with contract against Spark related to a membership interest purchase agreement, subsequent dropdown, and associated earnout agreements with the Major Energy Companies' former owners. The relief sought includes unspecified compensatory and punitive damages, prejudgment and post-judgment interest, and attorneys’ fees. This case went to trial during the first two weeks of March 2020 and all material has been submitted to the Judge for his decision. Given the trial was in Manhattan, New York, which was previously under a shelter-in-place order and is currently re-opening in phases, we are not able to predict when we receive a final decision on this matter. Spark and NG&E deny the allegations asserted by Plaintiffs and have vigorously defended this matter; however, we cannot predict the outcome or consequences of this case at this time.

In addition to the matters disclosed above, the Company may from time to time be subject to legal proceedings that arise in the ordinary course of business. Although there can be no assurance in this regard, the Company does not expect any of those legal proceedings to have a material adverse effect on the Company’s results of operations, cash flows or financial condition.

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Regulatory Matters

Many state regulators have increased scrutiny on retail energy providers, across all industry providers. We are subject to regular regulatory inquiries and preliminary investigations in the ordinary course of our business. Below is a summary of our currently pending material state regulatory matters. The following state regulatory matters are in various stages and are subject to substantial uncertainties concerning the outcome of material factual and legal issues. Accordingly, we cannot currently predict the manner and timing of the resolution of these state regulatory matters or estimate a range of possible losses or a minimum loss that could result from an adverse action. Management does not currently expect that any currently pending state regulatory matters will have a material adverse effect on our financial position or results of operations.

Connecticut. The Company has been working with the Connecticut Public Utilities Regulatory Authority ("PURA") regarding compliance with requirements implemented in 2016 that customer bills include any changes to existing rates effective for the next billing cycle. The Company and other ESCOs in Connecticut have agreed to submit to a proceeding offering amnesty to ESCOs that self-report violations and offer to voluntarily remit refunds to customers. The Company has remitted for its brands operating in Connecticut its report of potential customers who would be eligible for refunds under the amnesty program and submitted its confidential settlement proposals. PURA is completing its review and audit and issuing final decisions regarding such amnesty payments. PURA has approved the Major and Verde brand settlements and refunds have been issued for Major and Verde customers. The Company is working with staff on the final approval for the Spark and Perigee brands, which we believe will be finalized by year end. The HIKO brand should be approved and a settlement completed in the first quarter of 2021.

Illinois. Spark Energy, LLC received a verbal inquiry from the Illinois Commerce Commission ("ICC") and the Illinois Attorney General ("IAG") on January 1, 2020 seeking to understand an increase in complaints from Illinois consumers. The Company met with the ICC and the IAG in February 2020 and plan to discuss a compliance plan to ensure its sales are in compliance with Illinois regulations. The parties also discussed possible restitution payments to any customers impacted by sales not in compliance with Illinois regulations. The Company is currently working with both regulators on this matter.

Maine. In early 2018, Staff of the Maine Public Utilities Commission (“Maine PUC”) issued letters to Electricity Maine seeking information about customer complaints principally associated with historical door-to-door (“D2D”) sales practices. In late July 2018, the Maine PUC issued an Order to Show Cause and Electricity Maine responded in mid-August 2018. The Commission scheduled a procedural conference in early 2019 that resulted in no intervenors other than participation as a party by the Maine Office of Public Advocate. At the conference, the parties agreed on a procedural schedule, including a one-day evidentiary hearing. Following post-hearing discovery, Initial and Reply Briefs were filed on August 30, 2019 and September 10, 2019, respectively. The Maine PUC hearing examiner released its report in April 2020 alleging failures of compliance related to enrollment and marketing practices by Electricity Maine. The Company has been cooperatively working with the Maine Office of Public Advocate and the staff of the Maine PUC. The Company has proposed a resolution of this matter which will be presented to the Maine PUC for approval by the end of 2020.

New York.

New York Attorney General. Prior to the purchase of Major Energy by the Company, in 2015, Major Energy Services, LLC and Major Energy Electric Services were contacted by the Attorney General, Bureau of Consumer Frauds & Protection for State of New York relating to their marketing practices. Major Energy has exchanged information in response to various requests from the Attorney General and recently agreed to respond to additional questions via remote proceedings in October of 2020. The parties are in settlement negotiations at this time. While investigations of this nature may be resolved in a manner that allows the retail energy supplier to continue operating in New York with stipulations, there can be no assurances that the New York Attorney General will not take more severe action.


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Ohio. Verde Energy USA Ohio, LLC (“Verde Ohio”) was the subject of a formal investigation by the Public Utilities Commission of Ohio (“PUCO”) initiated on April 16, 2019. The investigation asserted that Verde Ohio may have violated Ohio’s retail energy supplier regulations. Verde Ohio voluntary suspended door-to-door marketing in Ohio in furtherance of settlement negotiations with the PUCO Staff. On September 6, 2019, Verde Ohio and PUCO Staff executed and filed with PUCO a Joint Stipulation and Recommendation for PUCO’s review and approval, which sets forth agreed settlement terms, which included approximately $1.9 million in refunds to customers and a penalty of $0.7 million. The settlement was approved by PUCO on February 26, 2020, and the Joint Stipulation and Recommendation resolves all of the issues raised in the investigation. The Company has provided all refunds to customers and is waiting on final approval of its license recertifications, which is expected to be decided by year end.

In addition, in September of 2019, the Ohio Attorney General (“OAG”) alleged that Verde Ohio had violated its Consumer Sales Practice Act and Do Not Call regulations. Verde Ohio is cooperating and responding to the OAG’s document requests; however, at this time, the Company cannot predict the outcome of this matter.

Pennsylvania. Verde Energy USA, Inc. (“Verde”) is the subject of a formal investigation by the Pennsylvania Public Utility Commission, Bureau of Investigation and Enforcement (“PPUC”) initiated on January 30, 2020. The investigation asserts that Verde may have violated Pennsylvania retail energy supplier regulations. The Company met with the PPUC in February 2020 to discuss the matter and to work with the PPUC cooperatively. Verde reached a settlement, which includes a civil penalty of $1.0 million and a $0.1 million contribution to the PPL hardship fund. On June 30, 2020, Verde and PPUC Bureau of Investigation and Enforcement filed a Joint Petition for Approval of Settlement and Statements in Support of that Joint Petition with the Commission. Verde is currently awaiting final approval of this settlement.

In addition to the matters disclosed above, in the ordinary course of business, the Company may from time to time be subject to regulators initiating informal reviews or issuing subpoenas for information as means to evaluate the Company and its subsidiaries’ compliance with applicable laws, rule, regulations and practices. Although there can be no assurance in this regard, the Company does not expect any of those regulatory reviews to have a material adverse effect on the Company’s results of operations, cash flows or financial condition.

Indirect Tax Audits

We are undergoing various types of indirect tax audits spanning from years 2014 to 2020 for which additional liabilities may arise. At the time of filing these condensed consolidated financial statements, these indirect tax audits are at an early stage and subject to substantial uncertainties concerning the outcome of audit findings and corresponding responses.

As of September 30, 2020 and December 31, 2019, we had accrued $19.7 million and $29.2 million, respectively, related to litigation and regulatory matters and $2.0 million and $1.8 million, respectively, related to indirect tax audits. The outcome of each of these may result in additional expense.

13. Transactions with Affiliates
Transactions with Affiliates

We enter into transactions with and pay certain costs on behalf of affiliates that are commonly controlled in order to reduce risk, reduce administrative expense, create economies of scale, create strategic alliances and supply goods and services to these related parties. We also sell and purchase natural gas and electricity with affiliates and pay an affiliate to perform telemarketing activities. We present receivables and payables with the same affiliate on a net basis in the condensed consolidated balance sheets as all affiliate activity is with parties under common control. Affiliated transactions include certain services to the affiliated companies associated with employee benefits provided through our benefit plans, insurance plans, leased office space, administrative salaries, due diligence work, recurring management consulting, and accounting, tax, legal, or technology services. Amounts billed are based on
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the services provided, departmental usage, or headcount, which are considered reasonable by management. As such, the accompanying condensed consolidated financial statements include costs that have been incurred by us and then directly billed or allocated to affiliates, as well as costs that have been incurred by our affiliates and then directly billed or allocated to us, and are recorded net in general and administrative expense on the condensed consolidated statements of operations with a corresponding accounts receivable—affiliates or accounts payable—affiliates, respectively, recorded in the condensed consolidated balance sheets. Transactions with affiliates for sales or purchases of natural gas and electricity are recorded in retail revenues, retail cost of revenues, and net asset optimization revenues in the condensed consolidated statements of operations with a corresponding accounts receivable—affiliate or accounts payable—affiliate are recorded in the condensed consolidated balance sheets.
Cost Allocations

Where costs incurred on behalf of the affiliate or us cannot be determined by specific identification for direct billing, the costs are allocated to the affiliated entities or us based on estimates of percentage of departmental usage, wages or headcount. The total net amount direct billed and allocated (to)/from affiliates was $(0.5) million and $(0.5) million for the three months ended September 30, 2020 and 2019, respectively. The total net amount direct billed and allocated (to)/from affiliates was $(0.5) million and $(0.1) million for the nine months ended September 30, 2020 and 2019, respectively.

General and administrative costs of $0.1 million and $0.2 million were recorded for the three and nine months ended September 30, 2020 related to telemarketing activities performed by an affiliate.

Accounts Receivable and Payable—Affiliates
As of September 30, 2020 and December 31, 2019, we had current accounts receivable—affiliates of $4.6 million and $2.0 million, respectively, and current accounts payable—affiliates of $0.4 million and $1.0 million, respectively.
Revenues and Cost of Revenues—Affiliates
Revenues recorded in net asset optimization revenues in the condensed consolidated statements of operations for the three months ended September 30, 2020 and 2019 related to affiliated sales were $0.1 million and $0.3 million, respectively. Revenues recorded in net asset optimization revenues in the condensed consolidated statements of operations for the nine months ended September 30, 2020 and 2019 related to affiliated sales were $0.8 million and $2.1 million, respectively.
Cost of revenues recorded in net asset optimization revenues in the condensed consolidated statements of operations for the three months ended September 30, 2020 and 2019 related to affiliated purchases were less than $0.1 million and less than $0.1 million, respectively. Cost of revenues recorded in net asset optimization revenues in the condensed consolidated statements of operations for the nine months ended September 30, 2020 and 2019 related to affiliated purchases were $0.2 million and $0.1 million, respectively. These amounts are presented as net on the condensed consolidated statements of operations.

Distributions to and Contributions from Affiliates

During three months ended September 30, 2020 and 2019, Spark HoldCo made distributions to affiliates of our Founder of $3.8 million for the payments of quarterly distribution on their respective Spark HoldCo units. During the three months ended September 30, 2020 and 2019, Spark HoldCo also made distributions to these affiliates for gross-up distributions of $5.9 million and $16.8 million, respectively, in connection with distributions made between Spark HoldCo and Spark Energy, Inc. for payment of income taxes incurred by us.

During each of the nine months ended September 30, 2020 and 2019, Spark HoldCo made distributions to affiliates of our Founder of $11.3 million and $11.3 million, for payments of quarterly distributions on their respective Spark HoldCo units. During the nine months ended September 30, 2020 and 2019, Spark HoldCo also made distributions
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to these affiliates for gross-up distributions of $12.1 million and $16.8 million, respectively, in connection with distributions made between Spark HoldCo and Spark Energy, Inc. for payment of income taxes incurred by us.

Subordinated Debt Facility

In June 2019, we and Spark HoldCo entered into a Subordinated Debt Facility with an affiliate owned by our Founder, which allows the Company to borrow up to $25.0 million. The Subordinated Debt Facility allows us to draw advances in increments of no less than $1.0 million per advance up to the maximum principal amount of the Subordinated Debt Facility. Advances thereunder accrue interest at 5% per annum from the date of the advance. As of September 30, 2020 and December 31, 2019, there was zero in outstanding borrowings under the Subordinated Debt Facility. See Note 9 "Debt" for a further description of terms and conditions of the Subordinated Debt Facility.

Tax Receivable Agreement

Prior to July 11, 2019, we were party to a Tax Receivable Agreement ("TRA") with affiliates. Effective July 11, 2019, the Company entered into a TRA Termination and Release Agreement (the “Release Agreement”), which provided for a full and complete termination of any further payment, reimbursement or performance obligation of the Company, Retailco and NuDevco Retail under the TRA, whether past, accrued or yet to arise. Pursuant to the Release Agreement, the Company made a cash payment of approximately $11.2 million on July 15, 2019 to Retailco and NuDevco Retail. In connection with the termination of the TRA, Spark HoldCo made a distribution of approximately $16.3 million on July 15, 2019 to Retailco and NuDevco Retail under the Spark HoldCo Third Amended and Restated Limited Liability Company Agreement, as amended.

14. Segment Reporting
Our determination of reportable business segments considers the strategic operating units under which we make financial decisions, allocate resources and assess performance of our business. Our reportable business segments are retail electricity and retail natural gas. The retail electricity segment consists of electricity sales and transmission to residential and commercial customers. The retail natural gas segment consists of natural gas sales to, and natural gas transportation and distribution for, residential and commercial customers. Corporate and other consists of expenses and assets of the retail electricity and natural gas segments that are managed at a consolidated level such as general and administrative expenses. Asset optimization activities are also included in Corporate and other.
For the three months ended September 30, 2020 and 2019, we recorded asset optimization revenues of $6.2 million and $14.6 million and asset optimization cost of revenues of $6.8 million and $14.9 million, respectively, and for the nine months ended September 30, 2020 and 2019, we recorded asset optimization revenues of $16.5 million and $50.7 million and asset optimization cost of revenues of $16.8 million and $48.5 million, respectively, which are presented on a net basis in asset optimization revenues.
We use retail gross margin to assess the performance of our operating segments. Retail gross margin is defined as operating (loss) income plus (i) depreciation and amortization expenses and (ii) general and administrative expenses, less (i) net asset optimization (expenses) revenues, (ii) net (losses) gains on non-trading derivative instruments, and (iii) net current period cash settlements on non-trading derivative instruments. We deduct net (losses) gains on non-trading derivative instruments, excluding current period cash settlements, from the retail gross margin calculation in order to remove the non-cash impact of net gains and losses on these derivative instruments. Retail gross margin should not be considered an alternative to, or more meaningful than, operating income, as determined in accordance with GAAP.
Below is a reconciliation of retail gross margin to income before income tax expense (in thousands):

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Three Months Ended September 30, Nine Months Ended September 30,
   2020 2019 2020 2019
Reconciliation of Retail Gross Margin to Income before taxes
Income before income tax expense $ 27,747  $ 44,243  $ 72,190  $ 17,959 
Interest and other income (80) (322) (293) (1,005)
Interest expense 1,487  2,174  4,233  6,392 
Operating income 29,154  46,095  76,130  23,346 
Depreciation and amortization 7,278  9,496  24,084  31,963 
General and administrative 19,080  27,629  66,087  94,352 
Less:
Net asset optimization (expense) revenues (558) (254) (319) 2,242 
Net, gain (loss) on non-trading derivative instruments 2,550  12,528  (14,019) (42,741)
Net, Cash settlements on non-trading derivative instruments 6,489  12,764  33,153  33,677 
Retail Gross Margin $ 47,031  $ 58,182  $ 147,486  $ 156,483 

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Financial data for business segments are as follows (in thousands):
Three Months Ended September 30, 2020
Retail
Electricity 		Retail
Natural Gas 		Corporate
and Other 		Eliminations Consolidated
Total Revenues $ 132,958  $ 8,230  $ (558) $ —  $ 140,630 
Retail cost of revenues 82,061  3,057  —  —  85,118 
Less:
Net asset optimization expense —  —  (558) —  (558)
Net, gain on non-trading derivative instruments 1,923  627  —  —  2,550 
Current period settlements on non-trading derivatives 6,212  277  —  —  6,489